I saw a link to this SWR approach over on the Bogleheads website and thought it was a pretty nifty idea. Basically it uses a formula based on the RMD withdrawal rates for nestegg depletion.

A retiree is often faced with the problem of deciding how much income to withdraw from a nestegg. The retiree will face a tradeoff between wanting as much income as possible over his lifetime and the certainty of never running out of money while he is alive.

As you may know, the RMD rules use a withdrawal scheme based on people who could live a very long (perhaps unrealistically long) lifetime. Specifically it uses the so called uniform lifetime table which we would be so lucky to live to.

The approach that the author specifies takes SWR withdrawals from your nestegg based on your RMD expected lifetime plus any "real" income that the nestegg throws off (ie dividends etc.).

The big advantage of a SWR scheme such as this is that the nesteg does indeed get depleted but with minimal probability of ever running out of money. Other approaches (like the 4% rule) often leave large unspent nesteggs when you go. Therefore a RMD approach has what they call much better utilization of the nestegg. An approach like this just may provide much more income to a retiree while he is alive than a traditional approach yet with much the same safety of outliving your money.

The other advantage of such an approach is that it's simple to follow and doesn't require complex calculations and nestegg churning to satisfy the withdrwal scheme.

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I like the simplicity of the modified RMD strategy, however it still would provide a larger withdrawal each year as you age (presuming your portfolio remained stable or sligthly increased each year). For me, I would like to spend more early in retirement, and then rachet down spending as the urge for travel (and other discretionary expenses) reduces. Of course, it's always good to anticipate the costs of health care later in life.

So far, my plan is to follow what I did in my pre-retirement years. Live below my means, and when income is high, spend a bit more. In years of poor income, spend less. To help me feel good about following a nice tidy formula, I'll still stay close to the 4% SWR.

The 4% SWR rule is conservatively set to allow those retiring into very hard economic times to come out OK. For most retirees though the rule leads to very large unspent (unutilized) nestegg balances when you go. If that's OK with you and lets you sleep well then so be it. Your heirs will enjoy the money.

But your approach while safe is, as the linked article points out, not optimum per a spendable money point of view - ie utility.

just for fun take a look at some of Gummi's work to see that depending historically on when you retired, the SWR that could have been used is often much much larger than the oft-quoted 4% SWR. Evidently the best year to have retired was 1950 where the safe withdrawal rate would have been more than 15%, believe it or not.

here is Gummi's model showing that if you retire at various times with a diverse portfolio that you could draw 6% or even significantly higher (depending on the markets). This is kind of the flip side of Bernstein's "retirement Calculator from Hell" series that show depending on when you retire you could indeed draw significantly more each year. Note that for a 30 year retirement, on one of these "good" years to retire you could withdraw 8% or higher and still never go broke.

For the plot the horizontal axis is the years you would spend in retirement. The vertical axis is the maximum fixed withdrwal rate you could use if you retired in that particular year. The green dot example shows if you need a 15 year retirement starting in 1960 that you could take out just under 12% and never go broke. Most of us probably want longer retirements so the far right data of 30 year retirements is more interesting. Note that if (for example) you retired in 1960 that over 30 years you could withdraw around 9% and never go broke. If you were lucky enough to retire in 1950 then (over 30 years) you could take out just over 15% per year and never go broke.

I like the simplicity of the modified RMD strategy, however it still would provide a larger withdrawal each year as you age (presuming your portfolio remained stable or sligthly increased each year).

Except that's the $64,000 question, there's no guarantee your portfolio will go up in a stable manner at all as you know. So you won't necessarily see your income go up from year to year though hopefully it will in the long run. And dividends can fluctuate too, another variable. So the RMD component helps preserve the portfolio and allow you to spend according to your returns, without as much probability you'll run out or leave an unintended residual. At least that's how I read it...

Took me a while to understand the chart. Thanks for providing it. Wouldn't it be nice to have retired in 1950 and draw 15% of porfolio every year? Need to get that new battery in the time machine again!

I like the simplicity of the modified RMD strategy, however it still would provide a larger withdrawal each year as you age (presuming your portfolio remained stable or sligthly increased each year). For me, I would like to spend more early in retirement, and then rachet down spending as the urge for travel (and other discretionary expenses) reduces. Of course, it's always good to anticipate the costs of health care later in life.

So far, my plan is to follow what I did in my pre-retirement years. Live below my means, and when income is high, spend a bit more. In years of poor income, spend less. To help me feel good about following a nice tidy formula, I'll still stay close to the 4% SWR.

RMD is Required MINIMUM Distribution. You can always take more from your IRA.

As all of our liquid assets are in IRAs, at 72.5 we will be forced to withdraw according to the RMD tables--but we don't have to spend it all. I imagine it will go from one Vanguard account to another.

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'As you may know, the RMD rules use a withdrawal scheme based on people who could live a very long (perhaps unrealistically long) lifetime. Specifically it uses the so called uniform lifetime table which we would be so lucky to live to.'

IRS 590, table 3 Uniform Life is joint life expectancy with a spouse 10 years younger. It can be derived from table 2.

In essence, using RMD under withdraws compared to your remaining life expectancy (unless you actually have a spouse 10 years younger), adding back in the cash flow from the portfolio results in a higher withdrawal rate.

'As you may know, the RMD rules use a withdrawal scheme based on people who could live a very long (perhaps unrealistically long) lifetime. Specifically it uses the so called uniform lifetime table which we would be so lucky to live to.'

IRS 590, table 3 Uniform Life is joint life expectancy with a spouse 10 years younger. It can be derived from table 2.

RMark:

The discussed distribution plan is not based on a joint life expectatncy. However, if you have the young wife - feel free to modify the plan to fit your needs.

The RMD approach doesn't seem very useful to me. I don't need an 8% w.r. when I'm 85. I need a system for maximizing utility from ages 40-70 or so.

Granted the approach may not work well for very early retirees. For them a more traditional approach is warranted.

Per the 8% withdrawal for an 85 year old person. Keep in mind that the nestegg is being slowly depleted, so the balance in the account is less than when he was 65. Hence the larger withdrawal rate as you age.

Seems to me that most of the regular posters here are likely to use their own SWR and modify it every year, or even more often, depending on what happens.

The message I've gotten from the many wise people here is to get rid of debt, make sure you have enough dependable income to cover fixed expenses, including escalating health care costs, and be conservative. And be flexible enough to be able to ride out the bad times in the market.

I like 4% as a start. I think most of us agree that we're going to adjust withdrawals during retirement to some degree, depending on how our portfolios or dividends perform. I think the RMD approach would feel pretty safe if the portfolio value was falling faster than expected and I needed to adjust my withdrawal rate. Then I could take the RMD and adjust spending down to fit. If the portfolio does much better, I'm not sure I'd have to spend the "extra". I'd rather let it build for a better nursing home and the kids. So RMD on the downside, but probably not on the upside.

The RMD approach doesn't seem very useful to me. I don't need an 8% w.r. when I'm 85. I need a system for maximizing utility from ages 40-70 or so.

I would certainly agree that using the RMD approach directly wouldn't be desirable for most, and the article recognizes same. But the modified RMD, where dividend income plus an RMD component has more appeal IMO. Something to think about, obviously you can massage the annual % as you like...the methodology is interesting.

From the first linked article -
'This result could be achieved by a modification to the RMD rule, namely to consume interest and dividends (but not capital gains), plus the RMD percentage of financial assets.'

RMD from IRS 590, table 3 is joint life expectancy assuming a spouse 10 years younger. A RMD at age 70 of 27.4 years is the same as a 70 yr old with a 60 yr old spouse from table 2, also 27.4 years.

The plan is essentially under-withdrawing compared to life expectancy (unless you actually have a spouse 10 yrs younger) + adding portfolio cash flow.

I will try to include these calculations in my Excel file when time permits. If the results show a higher withdrawal for the next 40-50 years, I would be happy to adopt it.

Quote:

Originally Posted by MasterBlaster

I saw a link to this SWR approach over on the Bogleheads website and thought it was a pretty nifty idea. Basically it uses a formula based on the RMD withdrawal rates for nestegg depletion.

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__________________Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.

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